Changing Economic Landscape: The Rise of Asia

The rise of emerging economies—especially the giant Asian economies—are rapidly changing the structure of world trade and finance. The management of global economic and financial affairs—adopting policies to sustain economic growth and promote stable finance—is becoming increasingly difficult without their active participation.

Growing economic weight

According to projections made by Goldman Sachs (2007), the emerging economies will grow rapidly over the next 40 years. Figure 1a [ PDF 35.8KB | 1 page ] shows that PRC's gross domestic product (GDP) (in 2006 prices) will grow quickly, surpassing Japan's in 2010 and the United States (US) GDP in the second half of the 2020s, thereby rising to become the world's largest economy by 2030. Similarly, India will also grow quickly by taking advantage of its favorable demographics, and its GDP is projected to overtake Japan's before 2030, and may catch up with the US's in around 2050. Brazil and Russia may not be as powerful economies as PRC and India, but their GDPs may overtake Japan's by 2040. (However, Figure 1b [ PDF 35.8KB | 1 page ] demonstrates that there will remain large gaps between the advanced economies and emerging economies—except for Russia—in terms of per capita incomes.)

These projections are of course uncertain, and could prove too optimistic if the world fails to address emerging constraints on the environment and on food, water, and resource availability. Nonetheless, they provide some useful guidance on the likely shift in economic power away from the traditional, advanced economies towards newly emerging players such as the PRC and India.

Foreign exchange reserves

Major emerging economies have relied on international trade and investment for their economic development and have clearly and substantially benefited from globalization. Some have experienced large current account surpluses and/or rising capital inflows and thus accumulated sizable foreign exchange reserves. This is particularly the case with the PRC, some other Asia's emerging economies, and oil producing countries such as Saudi Arabia and Russia. The ongoing global financial and economic crisis demonstrates once again that holding large foreign exchange reserves can provide countries with space for macroeconomic policy and cushion them in weathering financial turmoil.

Countries with large foreign exchange reserves have also made contributions to global financial stability by providing part of their reserves to the IMF, or making them available for other purposes. The G20 leaders agreed at the London Summit to expand the size of IMF resources from the then existing US$250 billion to US$750 billion in order to cope with the negative impact of the global financial crisis on emerging economies. Part of this financing came from advanced economies—US$100 billion each from Japan and the US and almost US$180 billion from European Union (EU) countries—but part came from emerging economies with abundant foreign exchange reserves; PRC led the way by providing up to US$50 billion, followed by Brazil, India, Republic of Korea (hereafter Korea) and Russia each providing US$10 billion.⁴

Global demand and economic recovery

PRC, India and other emerging economies have figured prominently in the recovery from the global financial crisis. Figure 2a [ PDF 33.2KB | 1 page ] plots annual real economic growth rates for advanced economies and emerging and developing economies (solid lines), along with their respective trend growth rates (dotted lines). Trend growth for emerging and developing economies was higher than that for advanced economies in the 1970s but the gap narrowed over time and essentially disappeared between 1985 and 1995. Since the second half of the 1990s, trend growth of emerging and developing economies has been rising, while that of advanced economies has been declining. There is clear “trend decoupling” between these groups over the past 10 years (although Figure 2b [ PDF 33.2KB | 1 page ] shows evidence against “cyclical decoupling”) and most projections expect that trend to continue.

Thus, major emerging economies have made surprisingly important contributions to the global recovery. Some of the largest have grown throughout the global financial crisis and helped to mitigate the collapse in global demand. They have pursued expansionary macroeconomic policies and are now embarking on structural policies to shift their economies' dependence from extra-regional to Asian demand. These policies are expected to also help to unwind global payments imbalances.

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Comment(s)

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1. Sritanu Chatterjee
   (posted 12 August 2010 / 12:31:26 PM)
   
   Dear Sir,
   
   The suggestions put forward in the paper are quite pertinent in today's scenario. In a multipolar world, regional institutions will have much bigger and responsible role to play.The paper would be more interesting if the shortcomings or problems of having too many regional institutions had been mentioned. Decentralisation leads to many benefit - increasing bureaucratic efficiency, localisation of knowledge base and global institutions gaining more confidence while taking decisions. But the problem lies in the implementation of the idea. In India, decentralisation or "panchyati raj" started in 1980s. But very few states have been able to implement it properly till date. For some states, it has aggravated the problems. Therefore, I think if more intense thought is given on the idea of implementation then it would expedite the process of formation of regional institutions.
   
   Thanks & Regards,
   Sritanu